Fundamental Overview

The continued upward momentum in the Greenback exerted pressure on riskier assets, bolstering the US Dollar Index (DXY) and maintaining EUR/USD price action subdued well below the 1.0900 level on Tuesday.

In this context, spot reached the area of three-week lows within the range of 1.0835–1.0830, while the USD Index (DXY) briefly trespassed the key 104.00 barrier. The European currency, in the meantime, remained apathetic despite further improvement in the Economic Sentiment in Germany and the broader euro bloc for the month of March, as released by the ZEW institute.

The US Dollar's (USD) extra strength came in contrast with the bearish performance in US yields across various maturity periods and marginal moves in German 10-year bund yields.

Examining the broader macroeconomic landscape, both the Federal Reserve (Fed) and the European Central Bank (ECB) are anticipated to initiate their easing cycles, potentially commencing in June. However, the pace of subsequent interest rate cuts may differ, leading to potentially divergent strategies for the two central banks. Nevertheless, the ECB is not expected to significantly lag behind the Fed.

Based on the FedWatch Tool provided by CME Group, the likelihood of a rate cut in June has remained around 55%.

Overall, the relatively sluggish fundamentals of the euro area, combined with the resilient US economy, reinforce expectations of a stronger Dollar in the medium term, particularly as both the ECB and the Fed potentially implement their easing measures almost simultaneously. In such a scenario, EUR/USD could undergo a more notable correction, initially aiming for its YTD low around 1.0700 before potentially revisiting the lows observed in late October 2023 or early November in the 1.0500 vicinity.